Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
This article is the second installment in a multi-part series exploring the issues Jim Whiddon faced as he decided to sell his practice. To view all articles in the series, click on “more by the same author” in the left margin.
As a war-history buff, I had always done a good amount of “war gaming” in our small advisory firm. When considering whether to sell the firm in 2012, I embarked on a six-month war-game exercise to decide whether to join forces with a similarly positioned ally within our industry. With the help of my team, I performed a detailed analysis of how well-prepared the firm was for the challenges facing it.
Several key threats emerged.
Getting hit by a bus
I always knew that a sudden and unprepared absence – created by my death, illness or an accident – would put an end to my small firm. In 2003, I was relieved from jury duty because of pressing professional obligations. I stood outside the downtown Dallas courthouse and dialed my phone to call my wife and tell her. Then, whoooosh ! Just one more step – literally – and I would have descended off the curb at just the instant a city bus barreled into me, making my wife an instant widow with two boys to raise. A near miss.
Unfortunately, a second “bus” did not miss us. In 2007, I lost my wife to cancer. She was a 44-year old dentist with a thriving private practice that went away overnight. From a business aspect, this tragedy magnified important questions. If something like this happened to me, what would happen to my staff? Where would my clients end up? While my family would likely be okay financially thanks to life insurance, I feared that others whom I cared deeply about would end up in far worse situations.
Even with the perspective provided by these events, my firm, like so many, still lacked a viable succession plan. An October 2013 article in Investment News stated that 67% of firms either don’t have succession plans for their businesses or have plans that aren’t ready to be implemented. I saw this issue as the core part of the fiduciary pledge I’d made to my clients. Who would take over if the unthinkable happens? Fiduciaries can’t say they don’t know, nor can they have vague answers to this question. Regulators are also rightly asking this question with more frequency.
Combining my firm with a larger firm immediately took this threat off the table. Some buses miss. Others don’t.
Wearing too many hats
As wealth advisors, our time is best used applying our core competencies to serve clients. The organizational tasks associated with running even a small firm eat up valuable time. I charted our team’s “red time” for several months in early 2012 and came to understand that our administrative and operational duties were taking up about 30% of the hours logged by our advisors and their teams. The advantages that merging with a larger firm offered in this area quickly became apparent.
We employed a part-time compliance officer. Our future partner had a compliance department. We tried to regularly assess investment alternatives as a small firm. They had a robust investment policy committee. We used a payroll service and had an employee who paid the bills. They had a finance and accounting department. We had an advisor who was in charge of trades. They had a trading desk. We had no technology officer and thus were forced to outsource to local vendors. They had an IT department. I did our marketing with the help of an excellent assistant. They had a chief marketing officer with a dedicated and professional communications staff.
You get the point.
Everything from trading to regulatory compliance to payroll was offloaded with our merger. This not only increased our opportunities to pay more attention to our current clients, but it also naturally increased the time available for new business development.
Employee turnover
Smaller firms have trouble creating viable career paths. Young, talented and ambitious advisors need a ladder on which to climb.
I had worked hard to create an atmosphere at my firm that nurtured talent and allowed up-and-coming advisors to thrive. We developed a great reputation within the advisor community and never had difficulty hiring qualified employees. We trained them well and kept them satisfied with their work for a time. But inevitably, opportunities arose. Our associates would be tempted to consider expanded career opportunities that met their personal and financial goals. In addition, sooner or later, employees understood that if they stayed, they would personally shoulder the succession threats faced by a small firm.
I was especially concerned about losing my best employees. They could be approached with an opportunity by another great firm, seek our another firm because of burnout from wearing too many hats at my firm or begin to understand the risks associated with a smaller firm. After the merger, I was very surprised to hear how big these issues really were. Your best staff members are considering these topics in some way right now – just as sure as you are reading this article and considering your own future.
Ask yourselves these questions: How devastating would it be if you lost a key team member? Would any clients follow them? Have you kept up deep relationship with your clients, or have you been complacent because you have such a competent staff? If you have a non-compete in place, how enforceable would it be? And even if it were solid, how much damage would be done if you lose your best employee? Confidence in your firm will most assuredly take a hit.
Compounding the problem of employee retention are simple supply-and-demand forces. According to Cerulli & Associates, by 2017, the financial-services industry will shed more than 25,000 advisors, down from its current total of just over 280,000, largely due to the retirement of baby boomers nearing the end of their careers. In the next decade, the firm estimates that a quarter of all advisors will retire, leaving a significant longer-term shortfall on the horizon. Competition to recruit and retain good advisors can only get stiffer.
By combining forces with a larger firm, career opportunities are readily available for our associates. Furthermore, benefits like more vacation time, dental insurance, long-term care, 401(k) and a charitable matching program all add to the benefits that I did not provide at my smaller firm. The idea of providing these weightier benefits and career advantages through a merger brought me personal satisfaction. I was able to give something back to the folks who helped me build my business.
Conclusion
Fortunately, these internal threats – however intimidating – are controllable. You can create a written succession plan and buy lots of insurance for “getting hit by a bus.” You can hire more people and outsource some of the hats you are wearing. And you can beef up salaries and benefits and try to grow fast enough to attract and keep good employees.
But these solutions are commensurate with your check-writing resources. They will cost you – in terms of both time and money.
In my next article, I’ll share a set of threats you cannot control – the industry-wide changes that all firms face, regardless of how deep their pockets may be.
James Whiddon, CFP, MSFS is a wealth advisor with Buckingham, an independent member of the BAM ALLIANCE. Buckingham provides wealth management for individuals, businesses, trusts, not-for-profits and retirement plans. He is the author of two books:Wealth Without WorryandThe Investing Revolutionaries.
Read more articles by Jim Whiddon
